Australian Dollar Softens as Bank Sees "More Time" for Inflation

by
David Liu, Technical Strategist

The Reserve Bank of Australia’s relatively dovish comments at its July meeting, continuing its commentary to keep monitoring inflation, partially cut the Australian dollar’s morning gains. Although there was little commentary on the direction of future rate increases, the Bank saw slowing domestic and global economies.

Highlights from the Reserve Bank of Australia’s July meeting minutes include:

*Board sees “more time” to assess strength of inflation

*Current “mildly restrictive” policy appropriate for economy

Chinese efforts to slow demand will have effect on Australia

Q2 CPI will be very important to shape future interest rate path

Global growth had slowed in the 2nd quarter

Bank expects strong investment growth, led by natural resources

Q2 terms of trade likely to be a record high

Labor market was not tightening “significantly”

Europe “more significant” risk for global economy

The Australian dollar gave up some early gains against the greenback as RBA statements that the Chinese slowdown may have possible negative effects on the Australian economy. Additional hints that the bank’s current policies were appropriate contributed to further weakness as traders interpreted this as a delay in future rate increases. Currently, Credit Suisse swaps show that traders are expected a 53.0 basis point decrease in the Reserve Bank of Australia’s Target Cash Rate over the next twelve months.

Despite the weaker commentary, the Australian dollar continues to hold onto its gains as US equity futures point upwards pending tomorrow’s second quarter releases from Goldman Sachs, Bank of America, Wells Fargo and Apple. At the time of writing, futures for the Dow Jones Industrial Average are up 0.243% while contracts for the broader S&P500 index indicate a gain of 0.214%.